We can only fix what we can see

22 November 2018

On November 1st, Prosper Canada and the Canadian Council on Social Development launched the Neighbourhood Financial Health Index (NFHI)– a new composite measure of household financial health at the neighbourhood level that takes into account the critical factors that determine our financial well-being – today and in the future.

Municipalities and community organizations have long had to rely on income data alone to understand which neighbourhoods were financially healthy or vulnerable, but financial health is about more than just income alone. More income helps, but only if we are also balancing day-to-day income and expenses, setting aside savings for emergencies and the longer term, minimizing unnecessary borrowing, and investing for the future in assets like education, housing or a business. Our ability to achieve this balance is also heavily influenced by where we live – in a community or neighbourhood marked by entrenched poverty or one where resources and opportunities abound.

The NFHI takes into account all of these factors, weighting and then combining six different indicators into a single measure of neighbourhood financial health. These indicators are: average household income, mortgage debt, consumer debt, real estate assets and liquid assets, and the proportion of low-income households in each neighbourhood or area.1

To see how financial health and vulnerability are distributed in your community, or any other community in Canada, readers can visit the NFHI’s online, interactive Community Financial Health Maps. These allow users to see how each neighbourhood ranks in their community and to explore the underlying drivers of financial health and vulnerability for each neighbourhood.

The NFHI took five years and a lot of effort to develop, so why go to all this trouble? We did it because, without adequate local data, communities cannot see the growing spread of financial vulnerability, nor can they determine its causes, develop effective solutions or target them to the right people.

The same is true regionally and nationally, and for policy makers, funders, financial institutions, and researchers more broadly. Adequate and relevant public data enables us, collectively, to spot emerging challenges, accurately diagnose their causes, and to develop and implement effective solutions.

Without it, we are flying blind.

As Canada and the world around it have evolved, so too have our data needs. However, updating the data we collect for public good purposes and how we collect it can be challenging. The recent controversy over Statistics Canada's effort to collect a sample of Canadians’ bank account and payments data is a perfect case in point.

Those opposing Statscan’s request have raised questions about Canadians’ right to privacy and concerns over whether this data would be adequately protected. Statscan has cited, in reply, the increasing impossibility of relying on outdated paper surveys and the declining quality of the data all levels of government rely on to measure and monitor the fundamentals of our economy.

Statscan is right to be concerned and we should be concerned too. Without the data they’re requesting, it’s almost impossible to understand and address one of the most troubling trends affecting Canadians today – namely our declining household financial health.

Canada ranks consistently as one of the best places to live in the world and one of the wealthiest.2 At the same time, however, the finances of Canadian households have undergone a dramatic sea change over the past 25 years – and not for the better.

While our aggregate net worth has increased in tandem with housing prices in key markets and investment wealth,3 many Canadians have actually seen little if any gain.4,5,6 At the same time, rising household debt has far outpaced any growth in our incomes.7 For the first time in Canadian history, our total household debt now exceeds our GDP.8 While the debt-service ratio for household mortgages has been very stable – 5-7 per cent since the early 1990s – heavily indebted Canadians will have increasing trouble managing their debt as interest rates rise.9 As a result, Canada is now on an unenviable watch list of countries at risk of a national debt crisis triggered by excessive household debt.10

Many Canadians are also finding it hard to save adequately, leaving them ill-prepared to weather short-term emergencies or to secure their retirement. Today, Canadians save just 4.4 per cent of their income annually,11 far below the 10 per cent recommended for an adequate retirement. Surveys also tell us that 41 per cent of Canadians live paycheque to paycheque12 and 22 per cent cannot manage an emergency expense of $2,000 within 30 days.13

Policy makers cannot fix what they cannot see and, right now, they have no idea why Canadian households overall are carrying more debt than ever before and why so many are failing to save even modestly for emergencies, let alone their future.

The Bank of Canada has raised interest rates to dampen borrowing and federal and provincial governments have taken steps to cool our overheated housing market. This has helped somewhat, but Canadians continue to borrow too much and not save enough and neither financial experts nor policy makers can explain why this is happening.

Or can we? U.S. experts are clear that precarious work is causing almost 40 per cent of Americans to experience significant and often unpredictable swings in the amount and timing of the income they receive each month. This is making it very hard for them to budget, plan financially, and save and causing them to borrow more to stay afloat in months when their incomes dip and their expenses spike. These findings came from various research studies, including – notably – a published analysis by JPMorgan Chase of its customers’ bank account data. Spurred by these findings, TD Bank conducted a national opinion survey in Canada that found that 37 per cent of working age adults here are in exactly the same boat – experiencing moderate to high income volatility and much lower levels of financial health than other Canadians. Without access to payment data though, Statscan cannot validate these findings.

Building on TD’s research and with support from the Investment Industry Regulatory Organization of Canada (IIROC), we were able to bring together US and Canadian household finance experts and government officials to explore this issue and bring it to the attention of policy makers – but this should not have been our job.

Had Statscan had access to a sample of Canadians’ payment data, they could have seen this issue emerging far sooner and federal and provincial policy makers would have been well down the road to developing solutions by now. As it is, they are just getting started or, worse, pursuing policies in some provinces that further aggravate the problem. And, we are still relying on American data to tell us what may be happening within our own borders.

Statscan is our national eyes and ears. They are the exemplar for statistical agencies worldwide and have a sterling track record when it comes to the protection of our data and privacy. When it comes to their core mission, though, they are only as good as the data we let them collect. Without adequate and relevant data, they cannot help us to see or understand the true parameters of the social and economic challenges we face, their causes, and who is most affected.

Yes, there are privacy tradeoffs involved – as with all personal data we currently collect from Canadians – and we need to use all means possible to protect this data, but the status quo is no longer an option.

So let’s give Statscan the data they need to do their job. Our future depends on it – because we can only fix what we can see.

1 All data for the NFHI is based on WealthScapes (2016), an Environics Analytics database of national financial statistics modelled downward using panel controls and advanced estimation techniques. For this report, NFHI indicator data are aggregated at the Census Subdivision (CSD), Census Metropolitan Area (CMA), provincial/territorial (PT), and national level. The accompanying online mapping tool, the NFHI Financial Health Maps, illustrates data at the Census Division (CD) and Census Tract (CT) levels within CMAs. For more details on census geographies, please see Statistics Canada (2017), Illustrated Glossary, Catalogue No. 92-195-X which provides definitions and related illustrations.

4 Between 1999 and 2016, the top 20 per cent of Canadians saw their net worth (total assets, less all debts) rise by more than $28 for each $1 increase gained by the bottom 40 per cent of Canadians, after inflation. The median increase (accounting for inflation) in net worth of the bottom 20 per cent rose just $1,100 while the top 20 per cent saw their net worth rise by a median of $844,300. Source: Analysis conducted by Dr. Jennifer Robson using Statistics Canada data (Table 11-10-0049-01, Survey of Financial Security, Assets and debts by net worth quintile, Canada).

6 Among older families and mortgage-free homeowners, for example, asset accumulation has outpaced growth in debt to a significant degree. The reverse is true among singles, renters, and young families who have experienced significant increases in median debt, but haven’t benefitted from asset appreciation. Sharanjit Uppal and Sebastien LaRochelle-Cote (2015), “Changes in debt and assets of Canadian families, 1999 to 2012,” Statistics Canada, Insights on Canadian Society, Catalogue no. 75-006-X, p. 5. See also: Matt Hurst (2011), “Debt and family type in Canada.” Statistics Canada, Canadian Social Trends, Catalogue no. 11-0008-X.

7 In 2016, total household debt rose by 4.4 per cent compared to a meagre 1.0 per cent for average incomes. Mortgage debt accounts for the largest proportion of total debt, rising by 5.1 per cent in 2016, while consumer and credit card debt grew by 2.6 per cent and 3.3 per cent, respectively. Source: Environics Analytics (2017), “Environics Analytics’ Wealthscapes 2017 reveals Canadians’ Financial Fortunes continue to Rise – News Release.”